Module 1 : Fundamentals of Managerial Accounting

Lecture 2 : Managerial Accounting Fundamentals

Objectives
In

this course you will learn the following

Money Measurement Concept.
Double Entry System.
Single Entry System.
Forms of organisation.
Stakeholders.

Money Measurement Concept

Money is the medium of exchange and the standard of economic value. Hence money measurement
concept requires that only those transactions which are capable of being measured in terms of money
are to be recorded in books of accounts.
Transactions that cannot be expressed in terms of money are not recorded in books.
Example1
Successful meeting with a prospective customer may be very important but can not be recorded in the
books of accounts.
Example2
Employees are the valuable resources of the organisation but their measurement in monetary terms is
not possible therefore, not recorded in books.

Double Entry
Dual aspect concept is the core of double entry book-keeping system.
According to it, every transaction has two aspects and both aspects are to be recorded in the
books of accounts.
Double entry system of book-keeping means that all transactions are recorded in two aspect one
involving the receiving benefit and other giving benefit in the accounts system.
For instance, buying a machinery for Rs.25,000 would be entered as a decrease in the cash
account, and as an increase in the machinery account.
The advantage of a double entry system is that it is comprehensive.
It will give you an accurate picture of your true financial position, not just your cash position. As
non-cash transactions can be huge, this is extremely important for robust financial management.
The disadvantage of double entry bookkeeping is that it needs significant details for regular
maintenance of books and not always easy to use.
It generally needs a qualified accountant to run it.
Every transaction has two aspects:
i. it increases one asset and decreases other asset.
ii. it increases an asset and increases other liability.
iii. it decreases an asset and decreases a liability.
iv. it decreases one liability and increases other liability.

Single Entry

It is difficult to definesingleentry systembecause, in fact, there exists no system

likesingleentry system. Broadly speaking, it is a defective double entry system. Any system that
falls short of complete double entry method is called singleentry system. Under this method,
sometimes both the aspects of transactionsare recorded, sometimes only one aspect is recorded
or sometime no aspects oftransactionsis recorded in the books.
In shortsingleentry system may be called a mix of double entry,singleentry and no entry.
For instance, buying a Machinery for Rs.25,000 would be entered as a payment in a cashbook.
It has the advantage of being simple, and spontaneous to use.
However, it may not account for non-cash (or non-bank) transactions. These are transactions
that will have a significant effect on the accounts, but do not immediately cause a change on the
cash or bank accounts.
Example
Goods sold on one months credit are not be recorded in the system at the time of sale of goods.
This will create a situation where a businessman can not anticipate exact cash position of the
particular month and therefore wrong planning.
Example of a non-cash transaction is ordering a Machinery for Rs.25,000. The machinery might
take a month to arrive. During that month, a single entry system would not record the
transaction on the formal accounts. This would mean that the accounting system has not shown
liability of Rs.25,000 payable to machinery suppliers: a dangerous situation.

Forms of Business Organization

Sole Proprietorship.
Hindu Undivided Family.
Partnership.
Company.
Co-operative Society.

Sole Proprietorship
It is a business owned and usually carried on by a
single person known as proprietor.
When the ownership and management of business
are in control of one individual, it is known as sole
proprietorship.

Advantages:
Ease of formation.
Better Control.
Prompt Decision Making.
Retention of Business Secrets.
Personal Attention to Consumer Need.

Disadvantages:
Limited life.
Unlimited liability.
Limited Financial Resources.
Limited Capacity of Individual.


Hindu Undivided Family
Hindu Undivided Family (HUF) business is a form of business organisation found only in India. In this
form of business, all the members of a Hindu undivided family own the business jointly. The affairs of
business are managed by the head of the family, who is known as the KARTA (can be male or
female).
HUF business comes into existence as per the Hindu Inheritance Laws of India. The membership is
limited up to three successive generations. Thus, an individual, his child(ren), and his grandchild(ren)
become the members of a HUF by birth. They are called Co-parceners. A daughter can also be a
coparcener.

Partnership
A partnership is a relationship between the persons who have agreed to share the profits. It is a
business owned and carried on by a group of people.
Each member of such a group is individually known as partner and collectively the members are
known as a partnership firm.
These firms are governed by the Indian Partnership Act,
1932. Registration of partnership is not compulsory. But
since registration entitles the firm to several benefits, it is
considered desirable.

Advantages:

Disadvantages:

Ease of formation.
Less regulations.
Sharing of Risk.
No corporate income tax.

Unlimited liability.
Difficult to raise capital.
Lack of Harmony.

Limited Liability Partnership

Limited Liability Partnership (LLP) can be formed by any two or more person, associated for carrying on
a lawful business with a view to profit, may by subscribing their names to an incorporation document
and filing the same with Registrar.
Limited Liability Partnership (LLP) is a separate legal entity.
Liability of the partners is limited to their agreed contribution in the LLP.
A firm, private company and unlisted public company is allowed to be converted into LLP in
accordance with Provisions of the LLP Act 2008.
The Indian Partnership Act 1932 is not applicable to LLPs.

Company / Corporation
Company form of business organisation is a voluntary association of persons to carry on business.
Normally, it is given a legal status and is subject to certain legal regulations. It is an association of
persons who generally contribute money for some common purpose. The money so contributed is the
capital of the company.
The persons who contribute capital are its members. The proportion of capital to which each
member is entitled is called his share, therefore members of a joint stock company are known as
shareholders and the capital of the company is known as share capital.
The companies are governed by the Indian Companies Act, 1956. The Act defines a company as
an artificial person created by law, having separate entity, with perpetual succession and a
common seal.

Advantages:
Unlimited life.
Professional Management.
Limited liability.
Ease of raising capital.
Highpossibilityofwealthmaximization.

Disadvantages:
Dividend Tax burden.
High cost of set-up and report filing.
More regulation.

Co-operative Society
Any ten persons can form a co-operative society. It functions under the Co-operative Societies Act,
1912 and other State Co-operative Societies Acts. A co-operative society is entirely different from all
other forms of organisation discussed above in terms of its objective. The co-operatives are formed
primarily to render services to its members.
Every member has a right to take part in the management of the society. Each member has one vote.
Generally the members elect a committee known as the Executive Committee to look after the day to
day administration and the said committee is responsible to the general body of members.

The liability of the members is limited to the extent of capital contributed by them.
Registration of a society under the Co-operative Societies Act is a must. Once it is registered, it
becomes a body corporate and enjoys certain privileges just like a joint stock company.

Some of the privileges are:

The society enjoys perpetual succession.
It has its own common seal.
It can own property in its name.
It can enter into contract with others.
It can sue others in court of law.

Generally it also provides some service to the society. The main objectives of co-operative society are:
a. rendering service rather than earning profit,
b. mutual help instead of competition, and
c. self help in place of dependence.
On the basis of objectives, various types of co-operatives are formed :
Consumer co-operatives.
Producers co-operatives.
Marketing co-operatives.
Housing Co-operatives.
Credit Co-operatives.
Forming Co-operatives.

Advantages :
Democratic management.
Assistance from the government.
Elimination of middlemens profit.
Fairly stable life.

Disadvantages :
Limited capital.
Lack of managerial talent.
Lack of motivation.
Lack of secrecy.
Dependence on the government.

Stakeholder
Stakeholder is a person who has a legitimate interest in an entity.
Investors.
Management of enterprise.
Creditors / Lenders.
Government.
Employees.
Consumers Local Community


Investor
Investor study the Financial Statement of the company before deciding upon whether to buy or not a
business or shares.
If they intend to buy, then the fair value of business or shares is also determined on the basis of the
detailed analysis of the Financial Statement.
Prospective investors make use of financial statements to assess the viability of investing in a business.
Management
Managers are the main users of the Financial Statement.
They use the financial statement
To make the inter firm and inter period
comparison.
To study trends in sales, expenses etc.
To understand the relationship among various
items of financial statement.
To know movement of funds through Fund Flow
Analysis.

Creditors/ Lenders
Creditor or Lender study the Financial statement of the borrower before advancing credit or loan.
Thereafter also the creditors and lenders analysis the Financial statement to find out whether the
business is solvent (in position to repay the loan).
Government
The amounts payable by concern by way of taxes levied by Government such as Income Tax, Sales
Tax, Excise etc. are examined on the basis of the data in Financial Statement.
Employees
Employees also use Financial Statements in making collective bargaining agreements with the
management, in the case of labour union or for individuals in discussing their compensation, promotion
and rankings.